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More On Legal & Compliance

from The Advisor's Professional Library

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Rule 206(4)-3 under the Investment Advisors Act establishes requirements governing cash payments to solicitors. The rule permits payment of cash referral fees to individuals and companies recommending clients to an RIA, but requires four conditions are first satisfied.

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Securities examiners deal harshly with RIAs that do not fulfill their fiduciary obligations toward senior investors, as the SEC and state securities regulators view older investors as particularly vulnerable and in need of protection.

Massachusetts Securities Regulator William Galvin announced Wednesday that five independent brokerage firms that sold non-traded REITs improperly have agreed to offer investors an additional $10.7 million in restitution in the wake of a review of their procedures in the sales of other REITs to Massachusetts investors.

This second round of restitution brings the total returned to investors as the result of the Massachusetts Securities Division’s investigation of sales of these investment trusts that own or manage real estate or do real estate financing to $21.6 million, the division said.

In addition, six brokerage firms in all paid fines of close to $1.5 million.

The securities division said that after the five firms paid fines and agreed to make restitution in May, they reviewed the sales of all other REITs they offered, which resulted in the restitution announced Wednesday.

A sixth firm, LPL Financial (LPLA), had completed both rounds of reviewing REIT sales earlier with restitution in the amount of $4.8 million.

“These investments are popular, but risky,” Galvin (right) said in a statement. “Our investigation showed widespread problems with adherence to the firms’ own policies as well as the state rule that an investor’s purchase of REITs cannot be more than 10% of that person’s liquid net worth.”

“The matter involved 126 transactions over an eight-year period, and enhancements have already been made to our system,” said Janine Wertheim, Securities America senior vice president and chief marketing officer, in a statement shared with ThinkAdvisor. “Many of the products continue to perform as expected, and some have even gone full cycle. We are glad to resolve this matter.”

Lincoln Financial issued the following statement about the issue: “We cooperated fully with the examination conducted by the Massachusetts Securities Division, and we are pleased to put this matter behind us.”

Commonwealth and Royal Alliance declined to comment, while Ameriprise did not respond to an inquiry as of press time.

In July, in the wake of the investigation of sales practices involving REITs, the securities division launched a broader inquiry into the sales of all types of “alternative investments” to seniors.

Subpoenas went to 15 entities, large and small, asking for information about their sales of these products to Massachusetts seniors and their supervision, compliance and training policies associated with such sales.

The material returned as a result of those subpoenas is under active investigation by the Securities Division.